Stablecoin Primer Section 2 — Stablecoin landscape
So are people actually using stablecoins?
This article is part of the Stablecoin Primer series. If you are interested in reading the other articles, check out this post.
Indeed they are! And there are actually many signs of mainstream adoption. We are 7 years into the stablecoin journey and adoption has never been stronger. In reality, the lifespan of the stablecoin subcategory is in and of itself a proof of stablecoins’ anti-fragility. However, in hopes of strengthening your conviction on the product-market fit of stablecoins, I want to rely on real data and market updates on where we stand at the moment — both globally and locally. Reviewing these should give us an understanding of the reasons why people are increasingly preferring stablecoins for their daily needs. And this in return, should highlight the potential ahead of stablecoins.
Globally 2020 was the breakout year for stablecoins thanks to the DeFi Boom. Stablecoins never stopped growing in popularity though. The total market cap (i.e., circulating supply) of stablecoins currently stands at a whopping $186 billion. This equals a ~5x growth from the beginning of 2021, and a more than 20x growth from 2020. On top of this, as we started 2022 in a crypto winter fashion with the entire crypto market down 43% from November 2021 all-time highs, in the same period, the stablecoin market cap experienced positive growth (which underlines stablecoins’ use as a hedge against crypto’s volatility — more on this later.)
Within the stablecoin market, there are more than 20 different stablecoins with more than $100 million market cap, and the top 5 coins account for +95% of the total market. With Tether’s USDT stablecoin as the consistent leader at $80 billion market cap, Circle and Coinbase’s USDC remains to be a strong runner-up at $53 billion market cap. A quick note — given the pace at which the stablecoin market is growing, numbers presented above will likely be outdated soon. The following are great resources to monitor the stablecoin landscape: Coinmarketcap’s Stablecoin Market Cap List, Coingecko’s Stablecoin by Market Cap List, and Dune’s Stablecoin Dashboard.
So now that we established that the stablecoin market has grown significantly over the last two years and developed an understanding of where the market is, let’s look at where the market could be.
Assessing the potential market size of stablecoins is a tricky subject given how little macro-level predications tend to tell us. With that said, one interesting approach has to do with the demand for the US dollar globally. Thanks to US dollar’s reserve currency status, it has a feature that no other currency has— it is more stable than other fiat monies. So across the globe, people and institutions want to save and transact with the US dollar. Yet, regulators and banks outside the US do not always allow for easy access to US dollars in an effort to protect their own local currencies. This pushes people to look for alternative methods of US dollar exposure, sometimes even through black market. Stablecoins effectively solve this problem because they are very easy to access and mostly US dollar denominated. What this means is that everyone demanding US dollars outside the US can essentially rely on stablecoins to meet their demand. As Ryan Watkins elaborated, this makes the target addressable market of stablecoins $57 trillion, and that’s quiet scary. This brings us to:
Product-market fit indicators from around the world
In this section, I aimed to select a set of countries where I have seen the strongest product-market fit indicators for stablecoins. Product-market fit usually tells whether a new product (physical — e.g., Away luggage; virtual — e.g., Telegram app) has successfully found a large user base and is measured quantitatively using popular metrics. For stablecoins, we already established that the potential market size is huge, so the spotlight will be on stablecoins, which are the products. Instead of quantitative metrics however, the focus will be on qualitative data that indicate stablecoins’ success in meeting its markets needs, and thus reaching product-market fit.
In the US, the strongest product-market fit indicator for stablecoins is the level of regulatory activity targeting stablecoins since the beginning of 2021. As I have mentioned above, the strong demand for the US dollar is a great thing — the more demand for it, the more valuable it is. So why regulate stablecoins although they are US dollar denominated, and thus increase the demand for the US dollar globally?
Because when this demand is in the form of stablecoins, the US government becomes alarmed. Flourishing of the stablecoin market is alarming in two ways. First, this means that the private stablecoin issuers, especially the US dollar backed ones like Circle and Tether are benefiting from the strength of the US dollar while not paying their dues like banks do. Second, increased adoption of the US dollar-backed stablecoins results in US dollars exiting the real economy for the crypto economy.
So the goal of anti-stablecoin regulation in the US becomes two-fold. First, the government wants to take a pie from the success of private stablecoin issuers by claiming that these issuers are already functioning as banks. This can be seen in the example of the report produced by the PWG from November 2021. In this report, stablecoin issuers are labeled as “systemically important”, the same designation used to describe financial institutions in the wake of the 2008 crisis. Second, by impeding the growth of stablecoins through regulation, the US government strategically aims to limit the most valuable liquidity source of the overall crypto economy. This effectively prevents any cryptocurrency from growing to a large enough market and user base that may threaten the reserve status and dominance of the US dollar.
To further dwell on the second point, you may ask “how can a new cryptocurrency pose a threat to the US dollar when there is already so much demand for the dollar?” This would clearly happen at an edge-case scenario but the US dollar may not be as strong and stable as many imagine it to be. Remember the Consumer Price Inflation discussion from Section 1? There we have established that we may be reaching a tipping point where US dollar’s supply growth may be outpacing tech advancements (and thus the availability of goods and services) which leads to the US dollar’s devaluation. So what happens when people who previously relied on US dollars to transact and save end up seeking an alternative currency that promises more stability?
The subtle message here is that, while still early to tell, stablecoins do have the potential to pose a real threat to the US dollar given how widely they are already used. And this substantiates the amount of regulatory activity targeting stablecoins in the US. With that said, regulation is an extensive subject which I won’t be discussing in detail in this Primer — my goal was to simply use regulation as a product-market fit indicator for stablecoins in the US.
Let’s now shift our focus to indicators from the emerging market, where the value proposition of stablecoins as an inflation-hedge tool is even more apparent.
You may remember from the Rower and Slow Cooker anecdote in the Intro section that the Turkish Lira as a fiat money has not functioned well lately. In fact, the annual inflation in Turkey soared to a 20-year high of 48.69% in January 2022. Following suit, Turkish Lira plunged 45% against the US Dollar. This came as a result of Turkish Central Bank’s years of unorthodox interest rate cutting policy, money printing to cover debts as well as the exodus of foreign capital from the country. Seeing this, lots of Turks flocked to fiat-to-crypto exchanges to swap their Turkish Liras with stablecoins. Surprisingly, at one point, this made Lira the most traded fiat money against Tether’s USDT, surpassing the US dollar and Euro.
What this means is that, when Turkish people wanted to protect their hard earned savings from Lira’s inflation, stablecoins were on their path of least resistance. From the local hairdresser to the most seasoned business owner, everybody in Turkey is interested in cryptocurrencies and especially in stablecoins. People’s trust in Turkish Lira is simply damaged. The question now is, will Turkish people ever forget the ease of accessing US dollars via stablecoins or is this going to be a trend going forward?
“Cryptocurrency adoption is high but stablecoin adoption is really high too; lots of businesses operate in USDT ‘’ tweeted Vitalik as he reviewed his prediction from a decade ago on Argentines’ crypto adoption. Similar to the reasons in Turkey, Argentina has been an inflation-plagued country with the latest inflation levels reaching 30%, nearing its highest level in three decades. And just like Turkish people, Argentines have been quite fond of stablecoins. Since they can not rely on traditional banking channels due to the US dollar withdrawal limits and taxation, many Argentines rely on USDT to protect their precious savings. On top of this, thanks to their high level of crypto literacy, Argentines are also fond of Maker’s decentralized DAI stablecoin, which is pegged 1:1 to the US Dollar. According to this Coindesk article on DAI’s adoption in Argentina, while people used to immediately convert their DAI’s to US dollars, more and more started keeping their savings in DAI simply because they trust the crypto channels more than traditional banking channels. Again, a scenario where stablecoins function as a safe haven.
Ukraine and Russia
Most recently, we saw how stablecoins can be a safe have during hardest times. With the disastrous impact of the war on Ukraine and Russia’s economies, we saw how innocent people of war immediately moved their wealth into stablecoins. With USDT providing an easy exposure to the US dollar, neither Ukrainians nor Russians had the stomach to watch their savings in their local currencies melt down.
We see product-market fit patterns on the other side of the globe too. Let’s talk about Asia. According to the Chainanalysis 2021 Cryptocurrency Adoption Index Report, which evaluates adoption based on individual transactions rather than country-level transaction volumes, Vietnam, India, and Pakistan are countries with the highest per-capita cryptocurrency adoption in the world. In these countries, stablecoin activity makes ~30% of the total crypto activity. While the rationale may differ from one country to the other, one thing for sure is that people are increasingly relying on stablecoins for their financial needs. This shows that stability of money in the form of stablecoins speaks to all of us, regardless of where we live.
If it seems like we’ve focused on abstract country-level examples a little too much, let’s take a look at a company-level example that may indicate stablecoins’ product-market fit.
When it comes to payments, the first company that comes to mind is PayPal. At the beginning of this year, reports revealed that the company would be working with the regulators to launch their own stablecoin, PayPal Coin. Why was this such a huge deal? Because PayPal has 350 million users. Considering how many of these users would be net-new entrants to the world of crypto thanks to PayPal’s stablecoin, this would be a big move towards not only stablecoins’ but also crypto’s mainstream adoption. Similarly, although we know that Meta’s Diem will not be happening soon, just try to imagine what would happen if Facebook were to make available their own stablecoin to its 2 billion users worldwide — a new global currency?
With these and so many more product-market fit examples such as Walmart’s that I haven’t even touched on, it’s difficult not to see that stablecoins are here to stay. Stablecoins are meeting people’s money needs, and countries and organizations are taking note of this shift. Then, the question becomes which specific money needs do stablecoins best address? — brings us to the use cases of stablecoins.
So far, we have made the case for stablecoins mostly as an inflation-hedge tool. In the end, inflation is a very urgent problem that affects millions of people’s day-to-day lives, and stablecoins are a strong solution to this problem. But as we saw in the Section 1, there are multiple functions of money and a variety of use cases associated with each function. A strong money contender should meet and/or exceed all of them. Taking a look at the emerging use cases of stablecoins reveals all the ways in which stablecoins are providing value to their users, both as an alternative to fiat currencies and as the lifeblood of the crypto economy.
Alternative to fiat
- Safe haven from fiat money’s inflation — As we established in the examples of Turkey and Argentina, in inflation-plagued countries the local currency becomes unusable — kind of like shitcoins. People in such countries can easily trade their savings in their local currency for stablecoins via fiat-to-crypto exchanges.
- Peer-to-peer transactions — Stablecoins provide a fast and easy way for two parties to send and receive money from each other. Users can simply send stablecoins from their wallets (e.g., Metamask) to the recipient’s public address.
- Payments — Traditional payment channels involve various intermediaries including commercial bank payment networks and card networks. For orchestrating all these parties, payment providers charge a flat fee plus an additional 1.5% — 3% charge for each transaction. Stablecoin based payments, however, completely streamlines the traditional payments process. Relying on blockchain technology, stablecoin payments disintermediate the entire payments process, reduce counterparty risk, and cost much less than traditional channels. See exciting updates from Solana and Circle allowing merchants to take stablecoin payments at very low costs.
- Cross-border payments — According to the World Bank, sending remittances across borders costs an average of 6.30% of the amount sent. So a user wanting to send $300 via traditional channels would be charged around $19; the same transaction with stablecoins costs less than $1.
- Savings alternative to negative rates — Central banks may sometimes offer negative interest rates, such as ECB’s current -0.5% rate. This means that when people deposit money into their savings account at their banks, they will be charged a fee instead of earning interest income. While this is a measure to disincentivize excessive saving, people who still want to save can rely on stablecoins to preserve their savings.
- Money Laundering — Given the ability to conduct any size of transaction globally in a pseudo-anonymous way using stablecoins, it is not difficult to think that money launderers could be charmed by this. While examples of money laundering using stablecoins exist, increased mainstream adoption should hopefully dwarf this use case.
Lifeblood of the crypto economy
- Safe haven from crypto’s volatility — Before stablecoins existed, crypto investors had to convert their on-chain holdings back into fiat currency so that they would avoid losing their wealth due to volatility (e.g., 20 Jan 2022 sell-off). Now, investors can rely on stablecoins to preserve their wealth on-chain and not have to deal with burdensome crypto-to-fiat conversions.
- Currency to move value between exchanges — Not every crypto exchange offers all tokens. Users can convert their fiat money to stablecoins via fiat-to-crypto exchanges (e.g., Coinbase) and send these stablecoins to their wallet at a crypto-to-crypto exchange (e.g., Binance), which may offer their desired token.
- Lend and borrow in DeFi dApps — DeFi protocols such as Maker Protocol allow for participants to take loans by depositing their stablecoins. Before stablecoins existed, such protocols relied on overcollateralizing loans using volatile tokens like ether, resulting in capital inefficient and risky systems. Thanks to stablecoin collaterals, DeFi protocols can now offer fixed returns, which may attract a completely new user base to the ecosystem (more on this in Section 4). Similarly, stablecoins can be lent in DeFi protocols such as Compound in exchange for stable returns (i.e., APYs) often beating rates provided by traditional savings accounts.
- Bootstrap liquidity in DEXs — Decentralized exchanges (DEXs) like Uniswap rely on mechanisms called automated market makers (AMM) that algorithmically define clearing prices of assets in their liquidity pools. These exchanges need as much liquidity as possible to execute trades at the desired prices with little price slippage. Stablecoins like USDT and DAI are widely used by DEXs to bootstrap liquidity.
- Salary payments in Web3 companies — Some DAOs may pay their full time contributors’ salaries in stablecoins, especially in the early days when their own DAO token does not yet have value.
Clearly, not all the use cases are equally common and this isn’t an exhaustive list of use cases. If I were to guess, I would say, safe haven from crypto’s volatility, lend and borrow in DeFi protocols, and safe haven from fiat money’s inflation are probably the top three use cases in terms of unique individuals conducting them (I will look into a way to visualize use case popularity better.) The overarching point of this section is that more stablecoin adoption leads to a wider variety of use cases, and this makes stablecoins an even stronger money contender.
With these various use cases and product-market fit indicators in mind, in Section 3 let’s continue our exploration by taking a deeper look at the different types of stablecoins and discuss design principles behind each type. This way we can find out how different stablecoin types can meet people’s money needs in different ways.
Stablecoin Primer — Intro: Rower and slow cooker
Stablecoin Primer — Section 1: Path to stablecoins
Stablecoin Primer — Section 2: Stablecoin landscape (you are here)
Stablecoin Primer — Section 3: Stablecoin types
Stablecoin Primer — Section 4: Stablecoin shallow dives
Stablecoin Primer — Section 5: Stablecoins’ future
Stablecoin Primer — Bonus section: Anything missed
Enjoy! Happy to chat further via comments, Twitter, or Linkedin
Special thanks to NEAR Team Grants for making this research possible.
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